A maturing software market with finite resources drives intense competition to design solutions for an increasing number of ever-narrowing market segments, industry verticals, and process categories. Partner ecosystems are essential for enterprise software vendors to extend a vendor’s product portfolio, fill white space in solution road maps, and augment and expand the execution team. These ecosystems increasingly specialize and rely on the intellectual property (IP) Innovation Networks of partners, suppliers, Financiers, Inventors, Transformers, and Brokers. As software vendors and system integrators expand into new markets, they will form solutions-centric ecosystems to enable exclusive, complementary, and “co-opetive” relationships. Technology strategy professionals must determine how to thrive in this era of solutions-centric ecosystems.

INTENSE COMPETITION DRIVES DEMAND FOR SOLUTIONS-CENTRIC ECOSYSTEMS
Vendors must increasingly rely on their partner ecosystems as development resource constraints and numerous microvertical requirements outpace internal efforts to rapidly bring solutions to a wide variety of stakeholders. Partners emerge as critical foot soldiers with a mission to capture client mindshare and address the market need for new solutions. Increased competition in new markets will drive the enterprise software market into a war of ecosystems, and four disruptive forces will compel vendors to transform their existing ecosystems from traditional and transitional ecosystems into solutions-centric ecosystems that exemplify Digital Business Networks (DBNs)

Market consolidation drives economies of scale as an industry matures.
Similar to the automobile industry in the past two decades, enterprise software vendors face waves of consolidation, innovation, and maturation. The power of Innovation Networks and ecosystems often emerge post-consolidation. For example, the auto majors — General Motors, Toyota Motor, Ford Motor, DaimlerChrysler, Nissan — have built ecosystems around their vehicle platforms. As the nexus of the ecosystem, each platform includes the power train (engine, transmission), the structural frame, common components, and standardized electrical integration points.

Working closely with partners, specialized auto suppliers design various systems from seating, interiors, instrument panels, and specific localization preferences around these platforms.

Specialized distributors improve the parts supply chain and develop innovations such as the shrink wrap used to protect vehicles from damage during transport. Brokers like AutoMax and Auto Nation transform how cars are sold. Financial arms like GMAC and Toyota Motor Credit change how autos are bought with innovative lease strategies. In this industry, vendors have come to realize that specialization provides a competitive advantage, and a go-it-alone strategy remains implausible if not impossible from a resource perspective.

Winners build high-volume “applistructure” platforms.
Like vehicle platforms, applistructure forms the nexus of Software Innovation Networks as the industry matures. Innovation Networks — built around open standards, middleware platforms, and software-as-a-service (SaaS) delivery — further specialize not only around product capabilities, but also distribution. Inventors will continue to design new solutions, Brokers will connect these solutions to new markets, and Transformers will innovate ideas and adapt them to the customer, while Financiers fund innovation to bring new ideas to market. Forrester expects Innovation Networks to be built around these ecosystems that focus on applistructure to address new markets.

Examples of supplier-side ecosystems include those that the Big Four (IBM, Microsoft, Oracle, and SAP) and BEA have built around middleware. Meanwhile, SaaS vendors such as SalesForce.com and NetSuite build ecosystems around their hosted platforms. Each vendor has developed the tools and technology platforms for their own development teams — and for partners to leverage as well. In some cases, smaller independent software vendors (ISVs) have adopted these middleware platforms instead of investing 30% to 35% of their R&D budget in tools and technology. On the distribution side, solution integrators with development capability will increasingly deliver microverticalized solutions built on these middleware stacks.

The enormity of delivering last-mile solutions pushes vendors to expand solution ecosystems.
Slowing revenue for the Big Four drives them to engage in a fierce battle for new market segments — the small and medium-size enterprise (SME) market, microverticals, service industry verticals, and emerging economies. Although these markets are vast, no single solution provider can deliver on the complete set of last-mile requirements of each narrow customer segment. Even with billions in the bank and broad customer bases, all sizes of vendors face finite resources in balancing the need to serve new markets while transforming existing IP for an SOA and Web services world.

For medium-size vendors, the goal is to focus IP on the last-mile solution. For the Big Four, their business models depend on creating broadly used platforms, not the creation of all the solutions that will use that platform now and on into the future. Ecosystem development remains the quickest and most effective model to extend both the product portfolio and the execution team. With value shifting toward the last mile, Big Four success depends on the creation of the most inclusive and comprehensive ecosystems. Some solutions-centric ecosystem examples include Microsoft’s Industry Builder’s Initiative (IBI), ISV Solution Maps for Oracle Applications, SalesForce AppsExchange, and SAP’s Industry Value Networks (IVN).

Ecosystems create “co-opetive” scenarios that capture the optimal share of the IT budget

Technology strategy professionals often view competing ecosystems as exclusive or complementary. However, as enterprises increasingly seek interoperability, expect future ecosystems to have a more “co-opetive” — cooperative and competitive — nature, with the goal of winning more business or gaining more access to the IT budget. In many cases, partners already compete with each other to deliver products on one front, but cooperate on another front. For example, while IBM partners with Oracle and SAP to deliver professional services, it competes head on in database with Oracle and middleware with SAP. Microsoft, on the other hand, partners with SAP and Epicor Software to deliver Microsoft Office integration, but directly competes with both vendors in the SME enterprise applications market. Successful ecosystems embrace and thrive on co-opetition while balancing the overall relationship into a win-win one.

SOLUTIONS-CENTRIC ECOSYSTEMS DISRUPT TODAY’S DIVISION OF LABOR

As solutions-centric ecosystems take hold, software vendors and system integrators (SIs) will disrupt the decades-old software world order by blurring and reversing their traditionally well-delineated Innovation Network roles in the following ways:

Software vendors move from Inventors to Transformers.
ISVs like Microsoft and SAP spent billions of dollars in R&D to invent relatively generic software, which was tossed over the wall to implementation partners whose armies of consultants would spend months or years transforming — i.e., configuring and extending — it to meet individual client needs. But eager to boost time-to-value for their clients and catch up with SaaS offerings, ISVs are now “servicizing” their product offerings — migrating them to open standards and middleware platforms to make it easier for transformation partners, or even end users, to rapidly configure and/or extend them as they see fit. With transformation partner ecosystems squarely in mind, ISVs are also focusing on improving the usability of development tool kits. In addition, expansion of deployment options includes the enablement of SaaS, hosting, and BPO. Examples include SAP’s BPO offerings in HR, Oracle’s push into hosting, and Microsoft’s CRM Live.

System integrators shift from Transformers to Inventors.
Having long played the software Transformer role, SIs with strong application development capabilities are starting to productize high-margin service offerings as repeatable software solutions. With the market and vendors encouraging the development of last-mile solutions on middleware platforms, SIs are rapidly evolving from IP exploiters to IP generators. Examples of IP that they have created include the generic “solution accelerators” that IBM and Accenture are developing based on industry process and data models. Vendor-specific IP inventions include Wipro’s SAP xApps frameworks and Columbus IT Partner, Tectura, and Iteration2’s Microsoft Dynamics extensions.

THE NEW SOFTWARE WORLD ORDER REVOLVES AROUND SOLUTIONS-CENTRIC ECOSYSTEMS

Digital Business Networks optimize solutions-centric ecosystems for the software industry. OEMs must assess which aspects of IP they will transform or invent. Once they have identified a core IP, customer-focused solutions built around that core provide the nexus and network for ecosystem development. Solution providers will often play any one of these key roles:

Solution OEMs that deliver the core IP and provide a focal point for the customer.
Solutionscentric ecosystems center on solution OEMs — ISVs or SIs with development capabilities —that drive the initial set of solutions to meet customer demand. As a result of OEM partnerships with suppliers and distributors, solutions throughout the network take shape to reach new sizes of business, industries, and geographies. Solution providers must make the most critical decision — what IP they will not build — so that they earn the trust of other partners. Solution OEMs play a role as the focal point for the customer and in delivering key IP and infrastructure designed to allow partners, both suppliers and distributors, to succeed and build their own ecosystems.

Suppliers that contribute noncore IP and co-develop solutions for the solution OEM.
Solution OEMs free up R&D investment dollars by relying on suppliers to deliver the noncore components and IP. Hardware platforms, office productivity, storage technologies, database, middleware platforms, analytic platforms, complementary applications from ISVs, and last-mile vertical solutions are areas of IP for enterprise solutions that may often be sourced. Solutions providers initially continue to drive agreements and partnerships. As these networks mature into Digital Business Networks, suppliers will increasingly collaborate on solution development or may take the initiative of delivering a solution in anticipation of a market request. SAP’s efforts with XApps partner development on NetWeaver represent this approach.

Distributors that provide access channels to the customer.
In the enterprise solutions space, these channels include last-mile solutions, ISV partners, resellers, implementation partners, managed application facilities, business process outsourcers, and third-party financiers. Today’s partnerships often focus on driving channel sales. Over time, expect distributors to provide input into the product design process or customer experience. As these networks mature into Digital Business Networks, distributors play a key role in assessing demand for features and solutions. A clear example in the market is how Microsoft Business Solutions works with its Dynamics partners.

Ray analyzes trends in ERP for the enterprise and midmarket. He also delivers strategic guidance in software licensing and pricing, researches business processes such as the order management cycle and continuous customer management, and assesses functional areas such as customer data integration and the impact of SOA on packaged applications. With this understanding of the overall ecosystem of solutions, technology, and system integrators, Ray provides strategy and guidance for many clients navigating through the vendor selection process. To contact Ray, please write to gosavi@forrester.com.